Strategies for Staying Afloat During the Coronavirus PandemicMay 27th, 2020 by Jim Allen
The Coronavirus Pandemic has turned out to be a once in a generation event that has affected millions of people worldwide both physically and financially. This pandemic has essentially shut down the United States economy putting millions out of work and causing a recession if not a potential depression. For those of you that have been affected financially, either through layoff, furlough or outright job elimination, there are strategies that may help you ride out this global natural disaster and get you back on your feet when it is over.
The CARES Act is intended to help provide support to people impacted by the pandemic, but there are also additional tools available to provide much needed cash during a financial crisis.
Increased Unemployment Insurance
If you are no longer working because of layoff or job elimination, you are entitled to state unemployment benefits. Your benefit is based on your wage income and is usually payable for a specified period or to a maximum dollar amount. The rules will vary depending on the state you live in. In addition to state unemployment benefits, the CARES ACT provides for an additional $600 for 39 weeks that is also available to self employed individuals who typically are not eligible for unemployment. If the economic shutdown has affected your employment you should file for unemployment benefits right away.
Coronavirus IRA and Retirement Plan Distributions
If you been affected by COVID 19 (subject to certain rules), you can take up to $100,000 from your IRA or retirement plan without the 10% early distribution penalty. While income tax would still be due, you will have the option to spread the taxable income over 3 years. This option may be particularly attractive to younger people who would normally be hit with the 10% penalty if they pulled money from their IRA for emergency purposes. Another benefit of this option is that you can return the IRA distribution within 3 years and not have the tax. The flexibility to spread the tax or return the funds makes this an attractive option for a short-term cash crunch regardless of age.
If you participate in a 401(k) or other employer retirement plan, you are generally able to take a loan from the plan. The loan limits are typically $50,000 or 50% of the plan balance, whichever is lower. You normally must repay the loan (with interest) over no more than 5 years. With the CARES Act, the 401(k) loan provisions have been loosened so that up to $100,000 or 100% of the pan balance can be borrowed with payments delayed for up to one year. Where an IRA or retirement plan distribution would be taxable (but with the tax spread over three years), a loan is not taxable unless you do not repay it.
Home Equity Lines of Credit
If you have a home equity line of credit (HELOC) in place, this may be another source to turn to for short term cash needs. Like a 401(k) loan, pulling money from your home equity is not taxable as the loan will have to be repaid. Generally, home equity loans may start out as interest only for a period before both interest and principal must be repaid.
A drawback to the HELOC is that you normally need to be employed to get a loan. So, if you already have the line of credit in place, this can be another option to meet your short-term cash needs. However, this likely is not going to be an option for those who are recently unemployed and do not already have a credit line.
Like the HELOC, a reverse mortgage is a loan against your home equity, but it works in a vastly different manner. While a HELOC will have to be repaid at some point and qualification is based on your income, reverse mortgages do not work this way. Qualification for a reverse mortgage is based only on your age and home equity so you can apply for a loan even if you are not working. But you must be over age 62 to qualify. The other major difference is that reverse mortgages do not require repayment until you die or move out of the home. Interest accrues on the loan meaning that the loan will grow over time but can never exceed the value of the home.
A reverse mortgage can be designed to pay off an existing mortgage, provide income or be set up as a line of credit. This flexible tool can be attractive for people over age 62 who have substantial home equity but have current cash flow needs.
Another provision of the CARES Act intended to help small businesses is the availability of Paycheck Protection Program or PPP Loans. These loans are designed to help keep small businesses afloat during the shutdown and provide favorable interest and repayment terms plus loan forgiveness if used to keep employees on payroll during a limited time. These loans turned out to be extremely popular and funding ran out quickly. The government may offer additional funding for PPP loans so small business owners should consider these for your cash flow needs.
Putting It All Together
Trying to replace income lost due to the economic shutdown can be a daunting task. However, the government has introduced programs to help individuals and businesses weather this storm. These government programs, in addition to other strategies like home equity loans can be important tools in helping to meet your financial needs during this unprecedented period of uncertainty. At Anchor Bay Capital, we specialize in cash flow planning and can help you put all the pieces of this puzzle together in the most financially effective manner for you. Give us a call to discuss your situation during the pandemic.